Council of Institutional Investors

Zombie Directors Still Haunt Boardrooms Despite New Era of Engagement
Thursday, October 29, 2015
by: Morgan Hrab and Glenn Davis

Section: CII Governance Alert

The undead still roam boardrooms despite a dramatic uptick in shareholder-company communication.

Companies and shareholders have been engaging like never before and this has resulted in a dramatic drop in the number of “zombie” directors, or directors who have failed to win majority support regardless of a company’s vote requirement. The number of these ghouls has fallen by more than half since 2010. ISS data shows 95 Russell 3000 directors were rejected that year and just 42 have been rejected so far in 2015.

But, it seems counterintuitive in this era of increased communication that boards are so reticent to remove zombies. An astonishing 88 percent of the 42 uncontested directors who failed to receive majority support in 2015 continue to lurk in boardrooms.

Any explanation that this lack of turnover is attributable to the time required to find suitable replacements is a ghost tale. Among directors who were rejected in 2014, nearly the same proportion (39 of 44 zombies) remains seated on boards. As this recently updated chart (login required) shows, one has to reach back to 2011 to find a year in which a majority of rejected directors are not still sitting on boards.

The vast majority of zombies are legally elected due to an outmoded plurality vote requirement that guarantees a candidate’s victory upon receiving a single favorable vote. CII encourages all companies to embrace a majority standard, and the number of companies doing so continues to increase every year. Current trends suggest shareholders may have to wait until the end of the decade before a majority of companies in the Russell 3000 will have adopted a majority vote standard. Yet even a majority vote standard does not guarantee a zombie’s removal. Some firms with this standard still insist on seating an undead director who has not received majority support.

Companies that should be commended for removing directors who were rejected in 2015 include BioScrip, First Niagara Financial and Performance Sports Group. In contrast, the situation at Healthcare Services Group could be classified as nothing less than a zombie apocalypse. Nine of its 10 directors have failed to receive majority support on a recurring basis. Seven have been rejected for two consecutive years, and two directors (Diane Casey and Dino Ottaviano) have been rejected for three consecutive years. Coincidentally absent from Healthcare Services Group’s Web site is a list of the company’s sitting board members. SEC filings indicate no changes to board composition since the 2015 election.

Some companies respond to director rejections by addressing what the board believes to be the underlying cause of the outcome. For example, this year Universal Insurance Holdings neither removed its rejected director Scott Callahan nor adopted a majority vote standard, but the board terminated its consulting arrangement with him. A full account of rejected candidates, their status, and any incoming correspondence is included in CII’s Board Accountability list, available here (login required).
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